On 26 January 2022, the Covid recovery and Reform Bill (the "Bill") was introduced to the Scottish Parliament. The Bill followed a consultation exercise by the Scottish Government on the proposed changes to Scottish bankruptcy (known as sequestration). These proposed changes generated a good deal of interest with almost 3,000 responses being received from individuals and representative organisations.
The key part of the Bill adjusts the minimum debt level required before a creditor can apply for sequestration in Scotland. Prior to Covid 19, the minimum a creditor had to be owed before they could apply for sequestration was £3,000 – it has been that level since 2008. At the start of the pandemic, when Government was concerned about the financial impact the pandemic would have on people, it introduced a wide range of measures to supress and prevent creditors from being able to take action against debtors. This included the radical increase of the minimum debt level to £10,000. This was designed to be a temporary measure and will rolled back on 31 March this year.
The Bill, assuming it passes, would introduce a new minimum debt level for sequestration of £5,000. This move would bring the minimum debt level for sequestration in Scotland into line with the minimum level for bankruptcy in England, which set the minimum at £5000 in 2015.
The financial impact on the Covid 19 pandemic has been enormous and those effects are being compounded by rising energy prices and higher inflation, leading to what is being described as the "cost of living crisis". Our expectation is that there will be a substantial rise in bankruptcy, both by individuals making applications for their own sequestration as well as creditors taking action to pursue debts that have built up over the pandemic at the end of March. Increasing the minimum debt level to £5,000 may assist those coming under financial pressure from creditors in the short term. However, it is important to remember that in Scotland sequestration can be accessed not only by individuals, but also by partnerships and unincorporated associations. The increase in the minimum debt level may not therefore assist all of those who find themselves overextended.
Here at Brodies our experts are already advising clients on their options, so if you have any questions on the impact of the bill or how you can petition for debtors sequestration, please get in contact.